JS Kim Uncovers Four Parallel Markets for Gold: Asia Futures, NY Futures, Physical Bullion, Physical Coins

October 16th, 2008

16 October 2008

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Today there have been four distinctly and differently priced markets established for gold: (1) Futures markets in Asia that consistently establish prices $20 an ounce to $60 an ounce higher than the prices established in (2) Futures markets in New York; (3) Physical bullion bars which dealers are starting to price at healthy premiums above both daily spot prices established in Asia and London/New York; and (4) Physical coins which dealers have always priced at premiums above bars and spot prices, but that are now selling at soaring premiums above spot prices.

Since the July 14th correction in gold and silver markets began, waterfall declines have occurred in gold prices in New York futures markets that trade paper gold where physical delivery of real gold occurs with less than 1% of all paper traded futures contracts. The differences in spot prices in Asian futures markets and in New York futures markets for gold have been staggering for the past 10-12 weeks, so much so that two distinct and separate future markets for gold have been established, one in which the gold price is significantly higher in Asia and another, where the gold price is significantly lower in New York. As they say, a picture can paint a thousand words so below you can find the daily spot charts in Asia and in London/New York so you can compare the huge discrepancies between these markets on a visual basis.

To explain the below charts, the graph (represented by the green fluorescent line) in the top row illustrates the gold price behavior in the Asia (HK) futures markets. The graph directly below (again represented by the green fluorescent line) illustrates the gold price behavior in the London/New York (L/NY) futures markets that very same day. I have posted the date of each daily 24-hour chart in the graphs below, and all dates represented in the graphs fall between the start of this gold/silver correction on July 14th, 2008 and October 1, 2008. At the bottom of all charts, I have also included the positive and negative price movements for gold for the days I’ve noted in the attached graphs.

Gold Futures Market I, Asia v. New York, Same Day

Gold Futures Market II, Asia v. New York, Same Day

Gold Futures Market III, Asia v. New York, Same Day

Gold Futures Market IV, Asia, Sundays Only (when New York/London Markets are Closed)

Some of the absolutely gargantuan anomalies I speak of above are as follows: On July 22, the gold futures market in Asia closed up a +$5 an ounce and by the time New York markets had closed, gold had lost $24 an ounce. On August 11, gold closed higher by $8 an ounce in Asia and then sold off in New York markets for a $40 an ounce loss. On August 14, gold closed higher by $2 an ounce in Asia, and again dropped like a stone in New York markets by $42 an ounce. Again on September 4, gold closed higher by $6 an ounce, then lost $24 an ounce by the time New York markets had closed. On September 9, gold was steady in Asia, only losing $2 an ounce, then again got hit in New York markets and lost an incredible $37 an ounce. While the losses I have delineated in Western markets are from the time the Asia futures markets close until New York markets close and thus include action in the London futures markets, the graphs illustrate that the waterfall selloffs happen in New York the bulk of the time, and almost always around 10 AM New York time.

While not every day for the last 10 weeks are represented by the patterns in the above graphs, the massive anomalies in prices between Asia and New York are not adequately explained by the regulatory differences between these two futures markets. According to Zhang Bingnan, the Beijing Gold Economy Center President, the “gold prices in China should be 1 yuan a gram, or more than $4 an ounce” higher than the prices established in New York or London. Obviously these regulatory differences can’t explain why gold prices in Asian futures markets are consistently higher than the NY futures prices by $20, $40, $60 and even $100 an ounce within a 24-hour trading period. Furthermore, even on a day in which the Asia higher/New York lower pattern was reversed, as on August 26th, the massive spike in gold price that produced (this time higher) the great diffrence in price between Asia and New York for that 24-hour trading period occurred again in the range of 10 AM New York time.

These graphs seem to point to visual evidence of manipulation by traders in New York that are using the futures markets not to hedge production, but to manipulate prices to make enormous profits in a very short period of time. I realize that the volume of contracts moved in New York futures markets for gold and silver is far more substantial then the volume of contracts moved in Hong Kong, but still, this still does not explain many anomalies for me, including the following:

(1) Why has gold consistently been valued higher in Asian markets and significantly higher on multiple days (to the tune of $20, $30, and even $40+ an ounce higher) in Asia all throughout this correction that started on July 15th? So far, I have not been able to find any other commodity, other than silver, that behaves like this. I have not found huge discrepancies in any other commodity where a commodity is consistently valued 2% to 4% higher in Asia than in other regions of the world.

(2) Should not gold have the same approximate value in Asia than it has in New York? Why would gold consistently be $10 - $100 more valuable in Hong Kong than in New York? As American firms (from what I understand) are allowed to trade in Asian markets, do not these huge arbitrage opportunities allow firms to earn illicit profits in the ranges of tens to hundreds of millions of dollars daily? And because gold prices consistently swing $30 to $60 an ounce in price from the high in Asia to the low in New York, are there American banks or investment firms that are using these price anomalies to enter and exit short futures contracts the same day?

(3) In the top of the graphs that illustrate the Asian futures markets, the price of gold, on the days it is higher, does not spike at the exact same period of time every day. The spikes higher seem to be random as one would expect in a free market. However, in the bottom row that depicts the same exact trading days in NY futures markets, a waterfall decline happens at almost the exact same time daily in many many of these charts, at about 10 AM New York time. At this time, gold often sheds $10, $20 and even $30 an ounce within an hour. How can free markets dictate that a sell-off of a commodity happens at the exact same time almost daily? What are the mathematical odds that such behavior would occur in a free market?

(4) As a control, I graphed all Sunday markets in gold since the start of this correction on July 15th, 2008. There are 11 such days. Sunday is a great day to see how the gold futures markets work because only Asian markets are open and my guess is that the elements in New York opt to stay out of the Asian markets on Sunday. Though all 11 weekends I have graphed fall within one of the steepest correction periods of this 7-year gold bull (July 15th to Oct.1, 2008), 8 weekends, or 73% of the time, Hong Kong gold markets were higher.

Though I am assuming that trading volume in Hong Kong markets is light on Sundays compared to the rest of the week, it seems odd that 73% of the days that are apparently free of NY players were positive. Furthermore, Hong Kong futures markets experienced some of its greatest increases in gold price (+$13, +$12 and +$20 an ounce) on days absent the NY players that seem to manipulate markets. Finally, the 3 down days were absent the type of waterfall declines we have seen in NY we have seen during the past 10 weeks with the declines amounting to -$9, -$4, and -$1 an ounce.

The above seems like compelling evidence to me that something is seriously amiss in the futures markets for gold (notably paper markets and easily manipulated because physical delivery of gold to settle these contracts happen less than 1% of the time) and that rampant manipulation for profits by just a few players is occurring in an unchecked fashion. According to data recently released by the Office of the Comptroller of the Currency, a division of the US Treasury, of the $135 billion of gold derivatives contracts (including futures and options) controlled by financial institutions, JP Morgan controls $96 billion (71.11%) of these contracts and HSBC Bank USA controls $34.4 billion (25.48%) of these contracts. In other words, just two players control almost all gold derivatives contracts in the entire United States.

The data to accompany the price behavior of gold on Sundays in Asia’s futures markets (represented by the chart above titled Gold Futures Markets IV) is below:

(all dates in 2008)

July 20 +$8 an ounce

July 27 +$3 an ounce

August 3 +$5 an ounce

August 10 +$8 an ounce

August 17 +$13 an ounce

August 24 -$9 an ounce

August 31 +$1 an ounce

September 7 +$12 an ounce

September 14 +$20 an ounce

September 21 -$4 an ounce

September 28 -$1 an ounce

The data to accompany the 3 graphs that compare Hong Kong and New York futures markets is below:

July 17

Asia closed up +$2 an ounce.

NY closed down -$10 an ounce.

July 18

Asia closed up +$6 an ounce.

NY closed down -$6 an ounce.

Jul 21

Asia closed up +$11 an ounce.

NY closed up +$1 an ounce.

July 22

Asia closed up $5 an ounce.

NY closed down -$24 an ounce.

Aug 4

Asia closed down -$1 an ounce.

NY closed down -$16 an ounce.

Aug 7

Asia closed up + $3 an ounce.

NY closed down -$15 an ounce.

Aug 11

Asia closed up +$8 an ounce.

NY closed down -$40 an ounce.

Aug 14

Asia closed up +$2 an ounce.

NY closed down -$42 an ounce.

Aug 26

Asia closed down $-9 an ounce.

NY closed up +$17 an ounce.

Aug 27

Asia closed up +$9 an ounce.

NY closed down -$4 an ounce.

Aug 29

Asia closed up +$9 an ounce.

NY closed down -$4 an ounce.

Sept 1

Asia closed up + $6 an ounce.

NY closed down -$7 an ounce.

Sept 4

Asia closed up +$6 an ounce.

NY closed down -$24 an ounce.

Sept 5

Asia closed up +$5 an ounce.

NY closed up +8 an ounce.

Sept 9

Asia closed down -$2 an ounce

NY closed down -$37 an ounce.

Sept 10

Asia closed up $10 an ounce.

NY closed down -$20 an ounce.

Sept 25

Asia closed up $8 an ounce.

NY closed down -$10 an ounce.

Sept 30

Asia closed down -$6 an ounce.

NY closed down -$23 an ounce.

Several weeks ago, on October 1, 2008, I sent the bulk of this information to Mr. Bart Chilton, Commissioner of the Commodities Futures Trading Commission (CFTC) located in Washington DC, requesting answers to some of my questions above. In reponse, Mr. Chilton replied to me with the following (the below message has not been altered in any way):

“Your point is that there are at times price differences between gold in Hong Kong and gold elsewhere, including New York. I know that when our folks looked at this in the past, they found that there are restrictions placed on gold flows into China which likely accounts for the differences (in other words, the Chinese gold market is not a freemarket).”

“To date, the market surveillance folks are not aware of any manipulative activity in the COMEX gold futures market. However, I think what has been going on certainly deserves closer attention. The simple existence
of price differences between different markets isn’t ‘incontrovertible’ evidence of manipulation. Price differences usually reflect differences in supply and demand at the different locations or the effects of
impediments to the free flow of the commodity at one point but not at another (such as governmental restrictions). While price differences may suggest improper activity, it would be much more likely that the
untoward activity occurred on the smaller and less liquid market (ie, the Hong Kong Market).”

“I am not convinced that what I have said is what is going on — just what I have been told in the past. I will try to get some more information for you.”

In reponse to Mr. Chilton’s message, I noted the following in another message that I sent to him recently that continued our correspondence:

I am aware that Chinese markets are very highly regulated but that does not necessarily mean because the market is smaller and less liquid, that this market is the one being manipulated to a greater extent than the one in New York. To address this issue, I only have two further points (albeit long ones):

(1) According to Zhang Bingnan, the Beijing Gold Economy Center President, “Gold prices in China should be 1 yuan a gram, or more than $4 an ounce, higher than the overseas market on average. The premium is a result of the spread between bids and offers in different bullion markets and the exchange rate.” Is this a reasonable statement to you, or are there perhaps other reasons that explain why the premiums are so vastly greater in Asia’s futures markets for gold than the $4 an ounce premium that Zhang Bingnan stated should be the reasonable expectation? The spreads for the past 10-12 weeks have consistently been $30, $40, $60 and even as much as $100 an ounce between the highs in Asia’s futures markets for gold and the lows in the New York futures market for gold.

As I inquired in my previous message, can you let me know if American banks or investment firms are using these huge arbitrage opportunities to enter and exit short futures contracts the same day or within a 48-72 hour period over and over again? If I am not mistaken, the CFTC should have access to this information. If this has indeed been occurring, would it be possible to let us know who these firms are, and if not, is there any reason why this information needs to stay secret? If this has occurred, while not evidence of manipulation, would this not be evidence that arbitrage opportunities are being leveraged to earn enormous profits in a manner inconsistent with the reasons why future markets were established? And would this not be grounds for further investigation?

(2) Secondly, Mr. Chilton, you stated to me that manipulation is most likely occurring in the Asian gold futures market and not in the New York futures market. If this is the case, then why are the spot prices established in Asia much closer the the prices of gold established in physical markets than the spot prices established in New York? Right now, there seems to be four different markets for gold. The spot price in Asia, the spot price in New York later that SAME DAY, the price of bullion (which is often selling at significant premiums over spot) and the price of gold coins (selling for even a more significant premium over the spot price).

While I do understand that soaring demand for physical gold, both bullion and coins, are setting higher prices for purchase of physical (real) gold thatn the prices in paper markets, I still believe that this begs the question of “what is wrong with the price of gold in the paper COMEX markets?” Perhaps I’m unaware of previous occurrences of enormous price spreads of this nature between physical markets and paper futures markets and this has happened before with some reasonable explanation. If you may be able to provide an example to me of previous times in history when spreads of 15% to 40% existed in physical market prices over the prices established in futures markets for the same commodity or asset, then perhaps it will help me understand what is going on with the prices of gold in the COMEX markets. My quest really is to understand the anomalies that seem to still be occurring between the price of gold in the physical markets and the price established in the COMEX paper futures market.

Special thanks to Ted Butler at SilverSeek, as his article, The Smoking Gun, about silver manipulation, encouraged me to perform my own investigation into the huge price anomalies between the gold futures markets in Asia and New York that have consistently occured for the past 12-14 weeks.

Again, if any of the information above raises any question in your mind as to whether or not free markets in the price of gold exists, or whether manipulation in gold/silver markets is an extension of the Wall Street bailout plan that is allowing illiquid banking institutions to recapitalize their balance sheets at the expense of the retail investor, I would encourage all of you who read this article to forward this article to everyone you know that shares your concerns. In addition, I would encourage all of you to write, call or fax your concerns to Mr. Bart Chilton as well as your actions will make a difference.

Mr. Ted Butler’s actions were enough to provoke an internal CFTC investigation into silver manipulation. My email containing the information in this above article was sufficient enough for Mr. Chilton to ask for a meeting at the CFTC to discuss this information. I firmly believe that every single person that reads this article and has concerns should pen a short note to Mr. Chilton expressing your concerns. Five minutes of your time, if this is an action taken by everyone, will be sufficient to prod the CFTC to not just call a meeting this time, but to open up a parallel investigation into gold price manipulation in the paper futures markets to their ongoing silver investigation.

Bart Chilton, Commissioner
Commodity Futures Trading Commission
Three Lafayette Center 1155 21st Street, NW
Washington DC 20581
Telephone: (202) 418-5060
Fax: (202) 418-5620

BChilton@cftc.gov